Protectionist Policies And Automation Shifts Will Hamper International Engineering

Key Takeaways

• Rising regulatory barriers and industry protectionism threaten Tata Technologies' international growth prospects and top-line performance.
  
• Dependence on key automotive clients, increasing competition, and lagging digital transformation expose the company to margin pressure and volatile earnings.
  
• Expansion into non-automotive sectors, strategic partnerships, and a focus on high-margin digital solutions are driving revenue diversification, stronger order pipelines, and improved profitability.

Catalysts

Provides product engineering and digital services in India, the United Kingdom, North America, rest of Europe, and internationally.

• National protectionist policies and growing localization of engineering services are expected to further increase regulatory barriers and reduce Tata Technologies' access to lucrative international markets, particularly in North America and Europe, putting prolonged pressure on top-line revenue growth.
  
• Accelerating adoption of automation and artificial intelligence by Tata's core client base is likely to structurally reduce demand for traditional engineering and R&D services, leading to permanently lower utilization rates and limiting operating leverage and future margin expansion.
  
• The company's heavy reliance on anchor clients in the automotive sector, specifically Tata Motors and Jaguar Land Rover, exposes it to heightened industry cyclicality and an increased risk of significant revenue loss if these major clients cut or delay IT and engineering spend.
  
• Persistently rising wage costs in India without a corresponding increase in billing rates, coupled with delays in scaling up high-margin proprietary software platforms, could lead to continued margin compression and sluggish earnings growth in the medium-to-long term.
  
• Intensifying competition from digital natives, industry-specific specialist firms, and global ER&D peers is likely to erode Tata Technologies' win rates on new deals and exert downward pressure on pricing, further straining both revenue growth and net profitability over the coming years.

Tata Technologies Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Tata Technologies compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Tata Technologies's revenue will grow by 7.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 13.3% today to 14.2% in 3 years time.
• The bearish analysts expect earnings to reach ₹9.1 billion (and earnings per share of ₹22.48) by about July 2028, up from ₹6.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 30.8x on those 2028 earnings, down from 43.5x today. This future PE is lower than the current PE for the IN IT industry at 31.1x.
• Analysts expect the number of shares outstanding to grow by 0.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.32%, as per the Simply Wall St company report.

Tata Technologies Future Earnings Per Share Growth

Risks

• The acceleration of digital transformation and the global shift to EVs are leading Tata Technologies' anchor clients, including Tata Motors and JLR, to reaffirm their commitment to new product investments, potentially underpinning sustained or higher revenues due to increased demand for engineering and digital services.
  
• The company is winning and scaling up large multiyear deals across new and existing verticals, especially in Aerospace (with Airbus and other supply chain players), and expanding its footprint with European and North Asian clients, increasing revenue diversification and reducing dependence on the automotive segment.
  
• The order book and qualified pipeline at the end of the quarter is materially stronger than the previous year, driven by multiple large deal closures, giving management confidence in sequential revenue recovery and longer-term topline growth.
  
• Tata Technologies continues to invest in higher-margin digital offerings such as AI frameworks for smart manufacturing and embedded systems, which is likely to boost overall operating margins and earnings as these become a larger share of the business.
  
• The BMW joint venture and deeper partnerships with both OEMs and Tier 1 suppliers worldwide are scaling ahead of expectations, resulting in growing profit contributions and broadening the company's access to premium engineering opportunities, supporting both revenue growth and sustainable net margins.

Valuation

• The assumed bearish price target for Tata Technologies is ₹450.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Tata Technologies's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1340.0, and the most bearish reporting a price target of just ₹450.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹64.0 billion, earnings will come to ₹9.1 billion, and it would be trading on a PE ratio of 30.8x, assuming you use a discount rate of 15.3%.
  
• Given the current share price of ₹734.6, the bearish analyst price target of ₹450.0 is 63.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.